Why Verizon’s proposed deal with cable companies could kill FiOS and cable competition as we know it

On Wednesday, executives from Verizon, Comcast, and various experts on anti-trust law and competition testified before a Senate committee to help decide the fate of a deal worth more than $3.6 billion that could reshape the face of Internet connectivity in the U.S. If it gets a green light, Verizon Wireless will purchase unused wireless spectrum from a consortium of cable companies. That deal, which was reached last December, included controversial agreements between the wireless carrier and cable providers, in which each arranged to market and advertise the other’s services — in some cases through “quadruple play” packages that could include TV, Internet, landline and wireless phone offerings. Although telecom and cable executives vigorously argued that the agreements would ultimately benefit consumers, the Senate committee raised serious doubts about the future of Verizon’s FiOS service, and of competition in home broadband and cable service entirely.

The end of competition

Ever since Congress passed the Telecommunications Act of 1996 — effectively deregulating the telecom industry in such a way that allowed phone providers and cable companies to start competing in each other’s markets — competition has grown relatively robust. Phone companies offer DSL broadband service in thousands of markets around the country, along with the increasing push of FiOS fiber-optic broadband. Cable companies offer their own cable broadband as well as television service, of which FiOS now also competes. And both industries offer traditional landline phone services, and even wireless services in many cases.

But the proposed agreement between Verizon Wireless and the consortium of cable companies — which includes Comcast, Time Warner, and Bright House Networks — will see cable companies paying Verizon hundreds of dollars for each cable contract obtained through Verizon marketing, and vice versa.

Steven Berry, President and CEO of the Rural Cellular Association, which includes smaller wireless carriers such as T-Mobile, Sprint Nextel Corp, and MetroPCS, called this arrangement essentially a “non-compete” agreement, guaranteeing cable won’t contend with Verizon on the wireless side, and Verizon won’t compete with cable in cable services. In fact, Verizon has specified as part of the deal that it will resell a portion of its proposed 4G LTE service back to cable companies once it acquires the additional spectrum, ostensibly making the cable companies mobile network operators (MNOs) for Verizon wireless service.

Originally, the cable companies purchased the spectrum in question in order to establish their own wireless carrier to compete with the likes of Verizon and AT&T. But they never mobilized the resources to commit to that endeavor, and instead have opted to sell the valuable asset.

Spectrum crunch

If the wireless carriers are to be believed, the additional spectrum could not come at a more crucial time. As Randal Milch, executive vice president at Verizon, stated in his testimony, it is “no secret we are currently in a critical situation. Customer demand for mobile bandwidth is growing faster than currently available spectrum.” He added that it was “critical that this previously unused spectrum be put to use to meet customers growing needs.” According to some FCC estimates, mobile data use will exceed current capacity by 2014.

But the FCC has already announced a looming auction to allay those concerns, in which wireless carriers will have the opportunity to bid on up to 120MHZ of unused airwaves. And Verizon Wireless already owns the largest portfolio of spectrum holdings in the wireless business, a principle motivator for the now-infamous AT&T/T-Mobile merger attempt.

Professor Timothy Wu of Columbia University warned in his testimony that if the deal is completed, Verizon’s spectrum holdings will actually be greater than T-Mobile and AT&T’s combined — Verizon is simply acquiring its wireless bandwidth in a more subtle way. Wu also offered that for the last decade, Verizon has been the “clearest and strongest competitor to the cable industry,” and that an agreement to essentially work together with cable companies in the future would severely harm customer choice.

The future of cable

FiOS television and broadband service, which Verizon has been rolling out in select locales since 2005, has been a vital competitor to cable in those markets. Although David Cohen, executive vice president at Comcast, assured legislators “there is nothing in this transaction that is going to stop us from continuing to try to beat the brains out of FiOS,” he did not speak to the 85 percent of cable subscribers who do not currently have the option for FiOS.

And that’s really what is at the heart of this debate: Verizon spent nearly $23 billion laying the infrastructure for FiOS in the comparatively small area that it currently serves — it’s financial incentive is to continue to offer its services in those regions, and to continue competing with whatever cable has to offer there.

But in the majority of the country — otherwise known as the 85 percent of customers who don’t yet have access to FiOS — this deal is basically a capitulation: Verizon has decided to give up on its own cable aspirations and instead collude with the companies that have already established themselves. As Senator Al Franken acknowledged during his questioning, it is “almost as if companies got in a room and decided to throw in the towel and stop competing with each other.”

Innovation at stake

The most insidious danger of such an arrangement may not be the most immediate one. Verizon had stated publicly as early as 2010 that it intended to stop its FiOS build-out when it reached its current size. And presently, no new services to directly compete with cable broadband have yet been planned. But as Professor Wu cautioned, what is truly at risk is “the future of disruptive innovation.” 4G wireless broadband services in the home — a fledgling technology that could replace the need for physical transmission lines completely, and is currently being trialed by Verizon (Home Fusion) and other wireless providers — has the best chance at being a cable and broadband replacement. How exactly is that service expected to grow and flourish if Verizon is busy bundling its wireless with Comcast’s cable offerings? And if Verizon consumes this additional spectrum at the expense of other wireless carriers (and at a relative discount), it is also limiting the future services those providers might offer. It would be shortsighted indeed to allow an agreement to pass that not only limits current competition, but in fact preempts future innovation.

In the end, what on the surface appears to be run-of-the-mill corporate deal-making, may in truth represent a fundamental change in the way cable and broadband is delivered in this country. We could end up with a a “perpetual quadruple play” instead of innovation, as Professor Wu phrased it. It’s as if Verizon has decided to double down in wireless, cable companies have done the same with their services, and all have agreed to scratch each other’s backs at the expense of the consumer. Before 1996, the telephone and cable companies had a government-sanctioned duopoly over their services — if we’re going back to that era, the least everyone involved can do is call a spade a spade.